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Photographer: Laura Buckman

Job Market Doesn't Justify a Rate Increase

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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Has the U.S. job market recovered enough for the Federal Reserve to start pulling back on economic stimulus, ending an unprecedented period of near-zero interest rates? Judging from how the Fed has acted in the past, it could wait awhile longer. 

The latest employment report portrays an economy still growing at a moderate pace. The Labor Department estimated that nonfarm employers added 173,000 jobs in August -- a bit less than in previous months, but still more than enough to accommodate natural growth in the labor force. The unemployment rate declined to 5.1 percent, down from 5.3 percent in July and the lowest level since the recovery began in mid-2009.

QuickTake Full Employment

In parsing the data, Fed officials are looking for signs that the economy is nearing full employment -- the point beyond which demand for workers and goods tends to trigger a spiral of increasing wages and prices. They want to start tightening monetary policy soon enough to prevent inflation from getting out of control, but not so early that they undermine the recovery.

So is it time? One way to get a sense: Compare today's labor market conditions with those at the beginning of previous tightening cycles.

Consider, for example, the unemployment rate. If Fed officials were looking at this measure alone, they probably would have moved already. It has reached the 5.1 percent level that economists tend to associate with full employment, and is well below where it was when the Fed started raising rates in 1986, 1994 and 2004. Here's a chart:

The unemployment rate, however, can be misleading. It counts only those people who are actively searching for work, a serious shortcoming at a time when many have stopped looking. If one focuses instead on how many people in their prime working years have jobs, the picture is less impressive: As of August, the employment-to-population ratio for 25- to 54-year-olds stood at 77.2 percent, about 1.8 million jobs short of its 20-year average. Before previous tightening cycles, it has been close to or above its long-term average:

The slow pace of wage gains, too, indicates that demand for labor isn’t yet outstripping the potential supply. Over the three months through August, average hourly earnings for production and nonsupervisory workers increased at an annualized rate of just 1.9 percent. That's significantly slower than the pace that has prompted the Fed to start removing stimulus in the past:

To be sure, the Fed faces different challenges today. It's starting from a point of much looser monetary policy, having lowered its interest-rate target near zero and bought trillions of dollars in bonds in an extraordinary effort to push down long-term interest rates. Also, given the recent turbulence in global markets, Fed officials might want to disabuse investors of the notion that the central bank's job is to put a floor on stock prices. All this may argue in favor of a small, symbolic rate increase, possibly as soon as the Fed's Sept. 16-17 meeting.

Beyond that, though, the evidence suggests that the Fed need not rush with rate increases -- and should do all it can to help the millions of people who still need jobs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Mark Whitehouse at

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Michael Newman at